The larger-than-life executive behind AirAsia, the Malaysian budget airline whose parent company now goes by the name Capital A, was in a reflective mood in a recent interview with Nikkei Asia.

He confessed he had assumed the coronavirus would pass as quickly as other health emergencies, like SARS or H1N1.

“I actually have to apologise to my communications team because I said, ‘Why are you making such a big deal out of this and scaring people?’

“I thought I had seen everything in 20 years. But, obviously, the pandemic is a global phenomenon that I never imagined would be how it is today.”

Under Fernandes, 58, AirAsia had snatched a significant share of the Asian market from premium carriers like Malaysia Airlines and Indonesia’s Garuda, and it flew over 50 million passengers in 2019 before the pandemic hit.

But now it finds itself at perhaps its lowest point. Over 200 aircraft from a fleet of 260 planes have remained idle for most of the last two years.

Annual results for 2021, expected next week, will show a cash outflow of RM1.4 billion, according to an estimate from Nomura.

Amid all this, Fernandes has pursued a frenetic expansion of the company into new businesses such as food delivery and a digital wallet, with ambitions to build a full-blown “superapp” to rival Grab and GoTo.

It is a strategy that entails heavy investment. Losses in those digital businesses in the third quarter last year almost added up to the loss in the core airline business.

Last month, the Bursa Malaysia stock exchange raised a red flag over Capital A’s finances, putting it under “Practice Note 17”, which demands that it conduct a financial restructuring within a year or face automatic delisting.

The shares fell 25% on the day the bourse made the announcement, and although the stock has recovered some ground since, at 62 sen this week it is a far cry from the RM4.60 all-time high recorded on March 1, 2018.

Factors that can trigger the PN17 clause include a slump in shareholders’ equity to less than 25% of a company’s share capital, an adverse audit opinion or the cessation of a company’s main business.

In the case of Capital A, its auditors pointed to significant uncertainties in the 2020 audit report that cast doubt on the group’s ability to continue as a going concern. Shareholders’ equity has also gone deeply negative.

Bursa Malaysia had put off triggering PN17 status for 18 months as the pandemic raged, but declined to give Capital A any more runway.

An incensed Fernandes rubbished the PN17 status, calling it outdated and a technical error by the exchange.

“PN17 is irrelevant to me and meaningless in terms of our liquidity and business. It is purely accounting,” he said with knitted eyebrows.

As the company pointed out in response to Bursa Malaysia’s announcement, it has been working to shore up its finances throughout the pandemic.

It conducted private share placements and a rights issue of convertible debt last year that together raised over RM1.3 billion.

Fernandes and co-founder Kamarudin Meranun now hold a quarter of Capital A shares, according to the company’s website, while Hong Kong-based businessman Stanley Choi holds an 8% stake.

Fernandes has also been restructuring other parts of his airline empire. AirAsia X, a medium-haul affiliate which he also controls, has completed a debt restructuring in which creditors wrote off most of their investment. AirAsia Japan, which used to be majority-owned by Capital A, was shut down in 2020 and has filed for bankruptcy.

The research house CGS-CIMB pointed out that satisfying Bursa Malaysia involves restoring shareholders’ equity to at least 50% of Capital A’s RM8.5 billion in paid-up share capital — a tall order considering the company had a negative shareholders’ funds position of RM3.2 billion at Sept 30.

“In order to be uplifted from PN17, it will need a RM7.4 billion boost to its shareholders’ funds on a pro forma basis,” it said in a note.

One likely accounting option to reduce the gap would be for Capital A to obtain shareholders’ and court approval for a capital reduction, it said, something that would make it less onerous to meet the 50% target.

Meanwhile, Capital A has been re-engineering its business structure so that its portfolio of businesses can more easily raise funds on their own.

To reduce its negative shareholders’ equity position, it could sell some of its interests in the non-airline assets, analysts suggest — although that raises the question of how quickly and at what valuations.

“A listing exercise will take time,” said Denny Oh, equity research analyst at Public Investment Bank. A direct sale is “a more viable option — though management may opine that business growth had not reached maturity and hence may not yet hit optimal valuation”.

Oh calculated that Capital A could recognise a gain of RM1 billion by selling a 25% stake in its digital assets.

Teleport, created from AirAsia’s cargo unit to become a full-service shipping and delivery business, was valued at US$300 million (RM1.26 billion) last year when it acquired a Malaysian food delivery platform.

The new superapp was valued at US$1 billion last July in an all-share deal to acquire Gojek’s operations in Thailand.

The name change to Capital A reflects the shift towards a holding company structure, where individual businesses have their own boards and managements.

Fernandes recently tapped telecoms industry veteran Jamaludin Ibrahim to chair its airlines subsidiary, which includes AirAsia, and suggested it could seek a separate stock market listing in the future.

Fernandes has said Capital A aims to raise a further RM1 billion or more this year.

Teleport has raised RM200 million in new equity so far this year, while the superapp business received RM200 million from a private investment in February, according to Fernandes.

Its Bigpay digital wallet, which is seeking a digital banking licence in Malaysia, received a US$100 million investment from South Korea’s conglomerate SK Group in August.

Fernandes said Bursa Malaysia’s stamp of financial distress isn’t disrupting ongoing fundraising activities for the company’s non-aviation digital businesses.

“Investors are coming in for the company’s fundamentals and prospects, not for some accounting standards,” he said.

Cash burn at the core airline business has been reduced through job losses and salary cuts.

The company is also trying to restructure its aircraft leases, conducting the kind of tough negotiations carriers around the world have been doing through the pandemic in an attempt to share the financial pain with leaseholders.

AirAsia’s lease liabilities amounted to RM13.9 billion as of the third quarter of 2021. It had managed to rewrite 17 leases involving a waiver of RM187.8 million, but it still has over 140 aircraft leases to be renegotiated.

As well as the financial plan Capital A must submit to Bursa Malaysia by next February, the company will also need to record a net profit in two consecutive quarterly results, verified by external auditors, immediately after the implementation of the plan.

Inevitably, that has Fernandes looking at the prospects for travel across Asia after the latest wave of the pandemic subsides.

For the first nine months of 2021, Capital A reported a net loss attributable to shareholders of RM2.2 billion. That was not much better than the RM2.7 billion it lost in the same period of 2020, but the company managed it on revenue of just RM1.02 billion, barely one-third of the same period the year before.

Indicators suggest the upcoming full-year figures will show continued improvement in the fourth quarter.

Preliminary statistics released earlier this month showed AirAsia’s operations across Malaysia, Indonesia and the Philippines increased capacity by 70% in the quarter and carried 2.7 million passengers, more than double the fourth quarter of 2020.

Moreover, planes were flying on average 80% full, the best load factor since the first quarter of 2020.

Maybank Investment Bank analyst Yin Shao Yang wrote in a recent note that Capital A’s fundamentals have improved despite the PN17 status. AirAsia operations in Malaysia, Thailand, Indonesia and the Philippines are now flying between 25% and 50% of their available aircraft, he said, “respectable” at a time when global aviation is still subdued.

“All our aforementioned analyses would be for naught if AirAsia Group’s outlook does not improve,” he said. “Yet, we believe that it has.”

Fernandes expressed confidence that the worst of Covid-19 really is behind us now, meaning no more apologies to the communications team will be necessary. Countries will be forced to reopen borders due to economic pressure, he predicted.

Travel demand in Asia will recover by the year-end and AirAsia’s whole fleet of planes will be operating to serve the rising demand by then, he said.

“I certainly don’t see China opening up anytime soon, but I think the rest of the world is, which means aviation is certainly going to be better in 2023,” he said. “People want to travel.”